Can Your Bank Forestall New Regs?

Griffin, Lucy, ABA Banking Journal

Yes, by understanding what consumers perceive to be unfair or deceptive practices

The legal definition of an unfair or deceptive trade practice is found in the Federal Trade Commission Act. But an easier way to understand the concept is to look at practices from the customer's perspective. A practice may be unfair or deceptive when what the customer expects will happen is different from what the vendor intends will happen.

Classic examples of unfair or deceptive practices include bait and switch techniques in advertising and selling; hiding important contract conditions in small print; or simply saying one thing and doing another. There are numerous examples of banking practices that consumers have considered unfair over the years. In fact, most of the bank compliance laws and regulations deal with practices that could be seen as unfair or deceptive.

History furnishes a ready example. When interest rates skyrocketed in the early 1980s, lenders designed the "discounted variable rate loan." Because there was--at that time--no explicit guidance in the Official Staff Commentary to Regulation Z, lenders disclosed an APR based on 30 years at the initial discounted or "teaser" rate. As a result, borrowers had no idea what their loan would really cost.

The official commentary now instructs lenders to prepare a blended-rate APR using the teaser rate for only the period of time that the loan would be discounted and the market rate for the remainder of the loan.

Deposit practices have also led to compliance regulations. Again, history holds the lesson. When some banks instituted the technique of paying interest only on the investable balance of deposit accounts, both customers and Congress got angry. The Truth in Savings Act, with its ban on the investable balance practice, is the direct result.

And, then, the Expedited Funds Availability Act responded to customer frustration with what they considered to be excessive holds placed on their deposits by banks.

History repeats itself

Why is this walk through Compliance Memory Lane important for bankers today?

The industry faces rising consumer concerns about practices old and new that consumers consider unfair and deceptive. When consumers don't like a banking practice, their opposition usually generates regulations. And the industry is giving consumers reasons to be unhappy.

First, as competition and the pressure to produce dividends for stockholders increase, banks are becoming increasingly creative in how products and services are designed and delivered. Second, banks are learning techniques from other business in the private sector and, unfortunately, customers don't always accept from a bank what they will accept from a grocery store or a lumberyard.

Consumer concerns about banking practices are rising as fast as banks invent new products, new services, and--perhaps most important--new selling techniques. And regulators' comments--in the main those from the Comptroller's Office--are increasingly strident.

How banks respond to these concerns will have everything to do with the limitation or increase of the compliance burden in the future. Attention only to the bottom line to the exclusion of customer interests will lead directly to new regulations. Effective responses to consumer concerns will keep new rules from emerging.

Rules and how they are made

The roots of what bankers face originates not in banking law but in something more general. The concepts of unfair and deceptive trade practices are established in the Federal Trade Commission Act. The Federal Trade Commission has the authority to identify, define, and prohibit practices that are unfair or deceptive to consumers. For the banking industry, the Federal Reserve Board has a parallel responsibility to identify unfair or deceptive practices.

Whenever FTC identifies a credit practice as unfair or deceptive, the Federal Reserve Board must review the practice in the context of banking and issue a substantially similar rule if it determines that the practice is unfair or deceptive when conducted by banks. …

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